Yes, you can cash out most life insurance policies, but the amount you receive and the tax consequences depend on the policy type and how long you've held it

If you own a permanent life insurance policy — whole life, universal life, or variable universal life — you have built up a cash value that belongs to you. You can access this money while you're alive through surrender, a policy loan, or a withdrawal, depending on your policy and your insurer's rules. Term life insurance has no cash value, so cashing it out is not an option.

The amount you receive is almost always less than the death benefit. When you surrender the policy entirely, you get the cash surrender value, which is the cash value minus any surrender charges your insurer applies. If you've held the policy only a few years, surrender charges can be steep — sometimes 10 percent or more of the cash value. These charges decline over time and eventually disappear.

Cashing out your policy ends the death benefit. Your beneficiaries will receive nothing when you die. Before you do this, make sure you understand what you're giving up and whether you still need the coverage.

Key Takeaways

  • Only permanent life insurance policies (whole life, universal life) have cash value you can access; term policies have none.
  • A full surrender pays you the cash surrender value, which is the cash value minus surrender charges that can be 5 to 10 percent or more in early years.
  • Policy loans let you borrow against the cash value without surrendering the policy, and the death benefit stays in place if you die before repaying.
  • Withdrawals let you take out part of the cash value, but amounts above your cost basis are taxed as ordinary income.
  • Surrendering your policy ends all coverage, so your beneficiaries receive nothing when you die.

The difference between surrender, loans, and withdrawals

A full surrender means you give the policy back to the insurer and receive the cash surrender value in a lump sum. The insurer calculates this by taking your cash value and subtracting any surrender charges still in effect. If you've held the policy for 10 or 15 years, surrender charges may be gone or minimal. If you've held it for 2 years, they can be substantial. Your insurer's policy document lists the surrender charge schedule.

A policy loan lets you borrow money using your cash value as collateral. You keep the policy and the death benefit stays active. If you die before repaying the loan, the insurer deducts what you owe from the death benefit your beneficiaries receive. Policy loans typically charge interest — the rate varies by insurer and policy type, often between 5 and 8 percent — and you can take years to repay. The advantage is that you don't lose coverage, and there's no tax on the loan itself.

A partial withdrawal lets you take out some of the cash value without surrendering the entire policy. The death benefit is reduced by the amount you withdraw, and you may owe surrender charges on that portion. Withdrawals are taxed differently than loans: money you withdraw that exceeds what you paid into the policy (your cost basis) is treated as taxable income.

How taxes work when you cash out

The tax treatment depends on which method you use. A policy loan is not taxed at all — you're borrowing your own money. A withdrawal or surrender is taxed only on the amount above your cost basis, which is the total premiums you paid into the policy minus any withdrawals you've already made.

For example, if you paid $50,000 in premiums over 20 years and your cash value is now $80,000, your cost basis is $50,000. If you withdraw or surrender, the $30,000 gain is taxed as ordinary income at your marginal tax rate. If you're in the 24 percent federal bracket, you owe $7,200 in federal tax on that gain. State income tax may apply as well.

If the cash value is less than what you paid in — which can happen with universal life policies if the insurer raised charges or investment returns were poor — you have no taxable gain. You can withdraw or surrender with no income tax.

The insurer will report the taxable amount to the IRS on a Form 1099-R if you withdraw or surrender. You report this on your tax return. If you're unsure whether a withdrawal will push you into a higher tax bracket or affect other tax situations, ask a tax professional before you cash out.

Surrender charges and how they shrink over time

Surrender charges exist because the insurer incurred costs to issue and underwrite your policy. These charges are highest in the first few years and decline on a schedule set when you bought the policy. A typical schedule might charge 10 percent in year one, 9 percent in year two, declining by 1 percent each year until year 10, when the charge is zero.

Your policy document includes a surrender charge schedule. If you've lost the document, call your insurer and ask them to send it or tell you the current surrender charge as a percentage of cash value. Some insurers let you view this online if you have an account set up.

Surrender charges apply only if you surrender the entire policy or make a withdrawal. They do not apply to policy loans. If you're thinking about cashing out within the first 5 to 10 years of owning the policy, a loan is usually cheaper than a surrender or withdrawal because you avoid the charge entirely.

When a policy loan makes more sense than surrender

A policy loan is often the better choice if you need cash but still want your beneficiaries to have coverage. You keep the death benefit in place, you don't owe income tax on the loan, and you can repay it on your own schedule. The trade-off is that you pay interest, and if you die before repaying, the loan balance reduces what your beneficiaries receive.

Loans also make sense if you're in the early years of the policy and surrender charges are high. Borrowing $10,000 against your cash value costs you interest but no surrender charge. Surrendering $10,000 might cost you $1,000 or more in charges if you're in year two or three.

The risk with loans is that if you don't repay them, the interest compounds and can eventually consume your entire cash value. If the cash value drops to zero because of unpaid interest, the policy lapses and you lose all coverage. This is rare but possible with universal life policies if you borrow heavily and don't repay.

What happens to your coverage when you cash out

If you surrender the entire policy, the death benefit ends immediately. Your beneficiaries will receive nothing when you die. If you have other life insurance — through an employer, a separate policy, or another source — that coverage continues. But if this was your only policy, your family has no death benefit.

If you take a policy loan or partial withdrawal, the death benefit is reduced by the amount you borrowed or withdrew. If you borrowed $50,000 against a $500,000 death benefit, your beneficiaries would receive $450,000 (minus any remaining loan balance if you haven't repaid it). The policy stays active as long as you pay premiums.

Before you cash out, think about whether your family still needs the death benefit. If you're cashing out because you no longer need coverage, that's one decision. If you're cashing out because you need money but still want coverage, a loan is usually better than surrender.

Steps to cash out your policy

Contact your insurance company directly — call the number on your policy or their website. Tell them you want to know your current cash value and ask about your options: surrender, loan, or withdrawal. They'll explain the surrender charges, the loan interest rate, and the tax implications for your specific policy.

Request a in-force illustration or a statement showing your current cash value, any surrender charges, and what you'd receive if you surrendered today. This gives you the exact numbers before you commit.

If you decide to proceed, the insurer will send you forms to sign. For a surrender, you're signing away the policy. For a loan, you're authorizing the loan and agreeing to the interest rate and repayment terms. For a withdrawal, you're specifying the amount. Read the forms carefully — they'll explain what happens to your coverage and any tax consequences.

After you sign and return the forms, the insurer typically processes the payment within one to two weeks. You'll receive a check or a direct deposit, depending on how you set it up. The insurer will also send you a Form 1099-R if there's a taxable gain, which you'll need for your tax return.

Frequently Asked Questions

Can I cash out a term life insurance policy?

No. Term life insurance has no cash value — you pay premiums for coverage during the term, and if you don't die during that time, the policy expires and you receive nothing. Only permanent policies (whole life, universal life, variable universal life) build cash value that you can access.

What if I surrender my policy and later want coverage again?

You can buy a new policy, but you'll be older and may have health changes that affect your rates or insurability. If you think you might need coverage later, a policy loan is safer than surrender because you keep the option to reinstate if you repay the loan within a certain period — usually one to three years, depending on your policy.

Will cashing out my policy affect my Social Security or Medicare?

Life insurance proceeds are not counted as income for Social Security or Medicare purposes. However, if you're receiving means-tested benefits like Medicaid or Supplemental Security Income, a large lump sum could affect your status. Check with your benefits administrator before you cash out if you receive any need-based assistance.

Can I cash out a policy someone else owns?

Only the policy owner can request a surrender, loan, or withdrawal. If someone else owns the policy and you're the beneficiary, you cannot access the cash value while the owner is alive. You receive the death benefit only after the owner dies.

What if my cash value is less than my surrender charges?

This can happen with universal life policies. If your cash value is $5,000 and the surrender charge is $6,000, you would owe money to surrender — the insurer would not pay you. In this case, you can take a policy loan instead, which doesn't trigger the surrender charge, or you can keep the policy and stop paying premiums if you no longer want coverage.